Most officials still expect interest rates to decline this year to 3.75% to 4%, as was the case when projections were last published in December. But eight policymakers forecast either no additional cuts or just one. Only two thought the Fed would lower rates by 0.75 percentage points, or deliver three quarter-point reductions this year.
By the end of 2026, most officials expect interest rates to decline by another half a percentage point to 3.25% to 3.5% before falling to around 3% in 2027.
Fed officials now see the economy growing only 1.7% this year, compared with their initial expectation for a 2.1% expansion, and predict the unemployment rate to rise to 4.4%. Officials also lifted their forecasts for core inflation, which strips out volatile food and energy prices, to 2.8%. Back in December, they expected it to end the year at 2.5%, already a big step up from earlier estimates.
Underlying these forecasts is a significant degree of uncertainty about how exactly Trump’s policies will take shape and how businesses and consumers will respond. Those unknowns have reinforced the Fed’s approach to stand pat for the moment. To lower interest rates again, it wants to see either more tangible evidence that inflation is indeed back on track to its 2% target or signs that the economy is starting to deteriorate sharply.
One of the biggest wild cards is tariffs, which the President has threatened on a scale beyond what many economists and policymakers initially expected. After much flip-flopping, levies on certain imports from Canada, Mexico and China are now in place, with all foreign steel and aluminium that comes into the United States. Trump and his advisers are now working on so-called reciprocal tariffs, which are due to be announced April 2 and aim to match the tariffs that other countries charge on US exports, while also factoring in other penalties such as taxes and currency manipulation.
The fear is that these policies, coupled with Trump’s efforts to slash government spending and deport immigrants, will not only intensify already sticky price pressures but also knock what has been a remarkably resilient economy off course. Taxes and deregulatory measures could help to prop up growth to some extent, which is why the Fed is primarily focused on the net effect of the government’s agenda.
Survey data suggests that Americans have already begun to sour on the outlook while also building in higher expectations about inflation, however. In a notable shift, the President and his advisers have repeatedly refused to rule out a recession, an admission that has jolted financial markets. They have also warned that consumer prices may rise temporarily. That combination would put the Fed in an even more difficult position, given its mandate to keep inflation low and stable and the labour market healthy.
Also Wednesday, the Fed announced that it would slow the reduction of its roughly US$6.8 trillion balance sheet in order to avoid amplifying disruptions that could crop up in funding markets due to the ongoing standoff over the debt ceiling, which limits how much money the government can borrow to meet its financial obligations. The Fed will now cap the amount of Treasury securities it will allow to roll off its balance sheet at US$5 billion per month, down from US$25b. It kept the monthly cap unchanged for mortgage-backed securities. Christopher Waller, a governor, voted against the decision.
This article originally appeared in The New York Times.
Written by: Colby Smith
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